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Oktay Kavrak. (Photo: Leverage Shares)

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Oktay Kavrak: ‘Optimism About Global Growth Is Falling’

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Value stocks and those with high-dividend yields may be more attractive, but overall market conditions could remain choppy until the conflict in Ukraine is closer to its conclusion, according to Leverage Shares’ Oktay Kavrak.

Kavrak, a product strategist at the firm, has developed short and leveraged exchange-traded products for the European Union and United Kingdom exchanges, including products that help traders short ETFs from Cathie Wood’s Ark Invest.

Via email, we asked Kavrak a few questions about the state of the current market and where he thinks it’s headed.

His answers could provide ideas for more-aggressive clients, as well as reasons for more-cautious investors to consider paying for annuities with strong value guarantees.

THINKADVISOR: What’s your view on where volatility is headed in Q3 & Q4?

OKTAY KAVRAK: Until we receive both indication that the conflict in Ukraine is closer to its conclusion and more clarity from central banks, I don’t expect volatility to subside for the remainder of 2022.

The perfect storm of rising prices, supply-chain issues and geopolitical turmoil makes the possibility of a soft landing by the Fed all the more difficult.

All eyes are on the Fed: Too much tightening will propel the economy into a downward spiral, into recession, while not enough rate hikes will likely result in ongoing, high-flying inflation.

I expect volatility to remain high in the second half as markets remain choppy in anticipation of policy decisions.

What are the greatest risks and opportunities for investors in this environment?

The greatest tail risk remains the hawkish stance of central banks in the face of high inflation.

Following the biggest rate hike by the Fed in almost 30 years, there’s a consensus that we’ll see another 50 to 75 basis hike in July.

Although inflation has likely peaked (or is close to peaking), optimism about global growth is falling. More aggressive hikes attempting to curtail the former are at the top of investors’ minds.

Unfortunately, the Fed cannot control the supply/demand imbalances caused by supply-chain issues with policy decisions.

0n the flip side, consumer sentiment reaching record lows in June is actually a great sign for the S&P 500: stocks tend to outperform by about 25% in the 12 months after a “sentiment trough.”

I see a lot of opportunities to buy beaten-down, mega-cap tech equities, which have seen their valuations decrease significantly in the first half.

Additionally, I still think there is room to run in the long commodities trade.

Energy has been the best-performing sector in both 2021 and thus far in 2022, and I don’t expect this to change drastically with ongoing geopolitical conflict in Ukraine.

Entry points matter — and lots of popular stocks are more attractive in the current market.

What do you think the chance of a recession is between now and 2023, and to what extent has the (equity) market already discounted a recession?

I’d say that there is a high chance of a recession and that the market hasn’t fully priced this in yet.

We will have more clarity after the next round of CPI figures is published and after the next Fed meeting.

We could realistically see a “technical” recession (i.e. two consecutive quarters in which GDP declines) as early as this year. U.S. GDP shrank by 1.4% in Q1 of 2022, with the possibility that it may contract again in Q2 based on the Atlanta Fed’s Projections.

Do you think the markets are oversold, and where do you see the major indexes ending 2022?

The markets are really oversold, as nearly 80% of the S&P 500 constituents are in the red this year. I don’t expect this to change much throughout 2022, other than a few “dead cat” bounces.

The companies with pricing power and control of supply-chain issues will outperform those with low-quality earnings.

Price predictions:

Nasdaq (NDX): 13,000. (Up from 11,637.77 June 28.) Tech companies look ever so unappealing in uncertain times, especially when yields are rising and making safe-haven assets more attractive.

S&P 500 (SPX): 4,200. (Up from 3,821.55 June 28). It has P/E ratio below 10-year average and is not as tech-dependent.

5. What should advisors be telling clients at midyear?

The last time we had such high inflation (1970s), energy, health care and financials were the top performers. Pay attention to these sectors in late 2022 and throughout 2023.

Investors with a time horizon less than two years should keep more dry powder.

This is what we’ve been seeing in the market: Flows into cash-equivalent assets like short-term bond ETFs are close to where they were during the COVID crash, indicating that investors are seeking flights to safety.

If investors are looking at equities, I would pay attention to value stocks and those with high-dividend yields.

Some mega-cap stocks are looking more attractive in the current market, but I would stay away (for the time being) from the speculative names with low-quality earnings.

I’d also advise investors to keep an eye on Chinese tech names, which have outperformed the U.S. and EU equity markets thus far in 2022.

Tailwinds include President Xi Jinping pledging to deploy more measures to support the economy and taking a more pragmatic stance against COVID-19.

Pictured: Oktay Kavrak. (Photo: Leverage Shares)